CFPB Aims To Limit Mandatory Arbitration In Financial Contracts

The Consumer Financial Protection Bureau has adopted a rule that would prohibit financial firms from forcing customers into arbitration in disputes over their bank and credit card accounts. The action by the nation’s consumer watchdog would free consumers to band together in class-action lawsuits that could cost banks and other financial firms billions of dollars. The new rule could take effect as soon as next year.

The new rule is one of the signature efforts of the Consumer Financial Protection Bureau. The agency was created in 2010 as part of the Dodd-Frank regulatory overhaul in the aftermath of the mortgage crisis. The consumer finance agency operates independently from the Trump administration.

Major American companies have used a series of legal maneuvers to block customers from going to court to fight potentially harmful business practices. Financial institutions use the fine print of their contracts to prevent consumers from banding together in a class and pooling their resources, while forcing them into private arbitration. There is no federal database that tracks arbitrations, and the process is entirely secretive.

Arbitration clauses have been sharply criticized for allowing corporations to circumvent the courts. The new rule does not explicitly outlaw arbitration, but prohibits its use in numerous circumstances and would apply only to the financial companies regulated by the agency. The protections would not apply to existing accounts, but new accounts would fall under the new rule. The rule would take effect 60 days after its publication in the Federal Register.

There is almost certain to be a political firestorm in Washington over the rule. Texas Republican Representative Jeb Hensarling said that the rule “should be thoroughly rejected by Congress under the Congressional Review Act.” The 1996 Congressional Review Act gives lawmakers about 60 legislative days to overturn the rule blocking mandatory arbitrations. The current Congress has employed the law to reverse 14 rules from the Obama administration.

Hensarling has already sent a letter last week threatening contempt proceedings against Mr. Cordray, the agency’s director. Hensarling claims that the agency failed to comply with a subpoena related to its work on the arbitration issue. The Treasury Department issued a report last month accusing the Consumer Financial Protection Bureau of regulatory overreach and calling for the president to be able to remove its director. The Chamber of Commerce said the arbitration rule is “a prime example of an agency gone rogue.”

The agency’s action represents the first significant blow to arbitration since two Supreme Court decisions, in 2011 and 2013, enshrined its use. It is now virtually impossible to apply for a credit card, rent a car, shop online, or get cable or internet service without agreeing to private arbitration. Both the Trump administration and House Republicans have pushed to lighten regulation on the financial industry. However, Republicans may find it difficult to kill a rule that could have wide populist appeal.